Tax rate will go down next year for Bay State wage earners

Massachusetts Gov. Charlie Baker speaks to reporters in the State House in this December file photo. (State House News Service file photo by Antonio Caban)

BOSTON – The Massachusetts state income tax rate will fall slightly in January, the third-to-last step in the tax rate’s odyssey from 5.95 percent in 1999 to its potential nadir two years from now at the voter-approved level of 5 percent.

Gov. Charlie Baker’s budget office confirmed Tuesday that the last of the economic benchmarks needed to trigger the reduction had been met resulting in the automatic lowering of the tax rate on income to 5.1 percent, from 5.15 percent.

While Baker and the Legislature budgeted for the expected lowering of the income rate in January by removing $74 million in projected revenues from its tax forecast for the fiscal 2016 budget, the income tax decrease is expected to result in $152 million less in tax collections in fiscal 2017, which starts next July.

Under a separate law, the Massachusetts minimum wage rate will rise to $10 an hour on Jan. 1, and the Bay State will be tied with California for the nation’s highest minimum wage, according to the group Business for a Fair Minimum Wage.

The administration and lawmakers could also choose to budget for another income tax decrease in January 2017, which would lower available revenues for budgeting next year even further.

Voters in 2000 passed a ballot law directing the state to lower the income tax rate to 5 percent over three years, but in 2002 the Legislature stepped in to block the final decrease as it dealt with falling revenues and an economic downturn that was putting a strain on state budgets and services.

In its place, the House and Senate agreed on a long-term plan to slowly ratchet the income tax rate down to 5 percent by half of a percentage point a year, provided that certain economic triggers were hit.

The first of five triggers was met in September when Department of Revenue Commissioner Mark Nunnelly reported that fiscal 2015 inflation-adjusted baseline tax revenues grew 5.37 percent over fiscal 2014, higher than the 2.5 percent growth rate required under the tax cut trigger law.

Earlier this year, Senate leaders passed a proposal over objections from Republicans and some Democrats to pay for an expansion of the earned income tax credit for low-income families by freezing the income tax rate at 5.15 percent.

The House rejected that proposal, and eventually legislative leaders and Gov. Baker reached a deal to pay for the EITC expansion without touching the income tax cut trigger law, allowing this latest decrease to occur.

Both Baker and Senate President Stanley Rosenberg are interested in further expanding the earned income tax credit, potentially in 2016.

While Republicans and Citizens for Limited Taxation have used the 15-year saga of trying to achieve a 5 percent income tax rate as campaign fodder for many cycles, the goal could be achieved within Baker’s first term if economic growth continues to drive reductions in 2017 and 2018 when Baker will be presumably be seeking re-election.

That could also be the year voters decide on another major tax policy.

Raise Up Massachusetts, the coalition behind last year’s mandatory sick leave law, has proposed a change to the state constitution that would tax earnings above $1 million at a rate 4 percentage points higher than the state income tax.

The change is being pitched as a way to address income inequality and generate new revenues for education and transportation infrastructure. The Department of Revenue estimates that the millionaires tax would generate roughly $1.9 billion in new income tax revenues to the state.